- 1.Tax Advantages Beyond Section 80C
For investors looking to combine protection with long-term wealth creation, ULIPs are a powerful tool. They are best known for offering a dual layer of tax benefits.
· Tax-Free Maturity and Death Benefits (Section 10(10D)): The entire returns and maturity proceeds from your ULIP are tax-exempt under this section. The maturity proceeds are tax-free if the annual premium is ₹2.5 lakh or less, effectively enabling ZERO LTCG tax. Through market-linked growth and the power of compounding, a Systematic Investment Plan (SIP) in ULIPs can help investors accumulate a corpus worth crores over the long term, all of which can be tax-free upon maturity. The death benefit paid to the nominee is also fully tax-exempt, regardless of the premium amount.
· Tax Deduction on Premiums (Section 80C): Investors can claim a deduction on the premiums paid for a ULIP, up to a maximum of ₹1.5 lakh every financial year. This deduction helps reduce investor’s taxable income. This is a widely known Section and is available only under the old tax regime. The unique proposition that ULIPs offer is actually on maturity, as detailed below.
· GST Benefit: The recent, GST 2.0 reform of Sep’2025 have eliminated GST on life insurance products. Thus, new age ULIPs emerge as highly efficient tax-saving instruments. They help one achieve their long-term corpus creation goals, whether it is retirement, child education, home purchase or any other big life goal. They are hence, now the only widely available market-linked instrument that can be opted for with ZERO Tax outlay (Direct & Indirect both).
- 2.Lower Expense ratio, Transparent Charges
Historically, ULIPs were often seen as a less attractive investment option compared to other market-linked instruments, such as mutual funds, because of their high cost structure. However, regulatory reforms by IRDAI coupled with digital-first, online products have transformed them into cost-efficient and transparent products.
- IRDAI Regulations: The regulator has capped the overall charges and mandated that fees should be spread evenly over the first five years, preventing high upfront costs.
- Competition from Mutual Funds: Insurance companies have reduced their charges, especially on online plans. Overall charges are capped at 2.25% per annum for the first 10 years, reducing thereafter. Fund management charges are further capped at 1.35% annually, a level comparable to the expense ratios of many mutual funds.
- Rise of Online and Passive ULIPs: The availability of online ULIPs has eliminated or reduced agent commissions, and passive -fund oriented ULIPs have significantly lower fund management charges.
- Reduced Charges: Many modern ULIPs either have zero premium allocation charges or have reduced other fees like policy administration charges.
These reforms ensure that a greater portion of the investor’s money actually goes into market-linked funds, boosting long-term compounding. This rationalisation of costs has helped rebuild investor trust and position ULIPs as a credible, competitive alternative to mutual funds.
- 3.ULIPs’ Waiver Of Premium Benefit: A Safety Net Missing in Mutual Funds
While mutual funds are purely investment products, ULIPs are a hybrid product that offers the dual benefit of investment and life insurance. While a mutual fund’s pay-out is simply its current market value, a ULIP’s death benefit is higher because of the sum assured (a guaranteed minimum amount) or the fund’s value. This ensures your family receives a financial safety net, even if the market performs poorly. Moreover, investors can opt for Waiver of Premium options, which ensure that the family’s goals continue to be built upon even after the policyholder’s unfortunate demise. In this option, the insurer continues to fund all future premiums into the policy in case of an unfortunate event, and comes with multiple variations that customer can select, such as a regular income to support the child’s school education etc.
- 4.Fund Switching
ULIPs allow for tax-free switching between different fund options (e.g., equity and debt) within the policy.
- 5.Long Term, Disciplined Investing
Along with all the other benefits, one key reason why ULIPs help in achieving long-term financial goals is the nature of the product construct, where long-term investing is encouraged. The minimum Policy Term for ULIPs is for 5 years, and this enables a very high level of discipline amongst serious investors, who would prefer to let the power of compounding and market-returns take charge of their corpus building objective. As most serious investors would be aware, it is important to spend time in the market, rather than timing the market. This behaviour is easier said than done, and non-ULIP instruments are not able to enable this behaviour through product design, and expect the investors to be disciplined, something that is many times tricky to stick to with multiple
Example – An investor considering two different investment options, a direct mutual fund and a ULIP, could expect the following outcomes based on the provided hypothetical scenarios.
Investor A had invested INR 20,000 monthly for 10 years in Direct Mutual Fund, assuming a historical return of 18.5% and an expense ratio of 0.63%, the pay out after 20 years would be INR 1,73,55,831. The long-term capital gains (LTCG) tax on this amount would be INR 21,18,690.
In contrast, if Investor B had invested the same amount of INR 20,000 monthly for 10 years in the India Growth Fund, assuming a historical return of 15.7% and an expense ratio of 1.73%, the pay out after 20 years would be INR 1,76,38,111. This plan also includes a sum assured of INR 24,00,000. The LTCG on this pay out would be zero, as ULIPs offer tax-free maturity proceeds.
Our Spokesperson’s quote
Pavit Laul, Head of Investments at Policybazaar.com said, “Online ULIPs have emerged as a superior choice for investors because they combine the best of both worlds — insurance protection and wealth creation. These new age ULIPs deliver tax benefits under Section 80C and tax-free maturity proceeds under Section 10(10D) for annual premiums up to ₹2.5 lac, at highly competitive costs, given the online nature of distribution.
Additionally, the recent scrapping of GST on Insurance products makes ULIPs significantly more cost-effective. The inclusion of Waiver of Premium benefit and the flexibility of tax-free fund switching further enhance their appeal, providing a comprehensive and efficient solution for long-term financial planning. ULIPs help families build long-term wealth to achieve their goals and also secure them against life’s uncertainties.”